Cathie Wood’s Ark Investment Management is known for betting big on disruptive technologies through its exchange-traded funds, like the Ark Innovation ETF. Wood is one of the most bullish voices on Wall Street when it comes to the potential upside of the tech sector in the long term.
Ark Invest just released a mind-boggling prediction for the artificial intelligence (AI) industry as part of its “Big Ideas 2023” report.
Today, the world’s knowledge workers — defined as programmers, engineers, lawyers, scientists, and information technology professionals — are paid about $32 trillion per year. Ark believes AI could increase the productivity of those workers fourfold by 2030, leading to as much as $200 trillion in economic output.
For context, the gross domestic product (GDP) of the entire world came in at $95 trillion in 2021.
How could AI create so much additional value? Well, Ark management said it believes the cost of training AI language models will fall by 70% every year from now until 2030, leading to an exponential increase in output — up to tenfold for a typical software engineer, for example.
Believe it or not, a few companies in the U.S. are already making substantial progress in the field. The one I want to focus on today is C3.ai (AI 6.45%). It flies under Wall Street’s radar with a valuation of just $3 billion, yet it pioneered a brand-new industry known as enterprise AI.
Here’s why it could be one of the biggest winners if Ark Invest’s predictions come true.
C3.ai is already a key part of many organizations’ AI strategy
You’ve probably heard of software-as-a-service (SaaS), where companies pay a recurring or consumption-based fee to access digital platforms to run their businesses. Think of enterprise AI as AI-as-a-service. C3.ai provides ready-made and customizable AI applications to 236 customers in 14 different industries, accelerating their adoption of this revolutionary technology.
See, not every company has the financial resources or the talent to build AI models from scratch. C3.ai fills that gap, and it’s able to deliver a turnkey application within six months of an initial project briefing. For organizations with dedicated technical teams, C3.ai also offers a development platform that includes low-code and no-code tools to speed up programming.
In fact, this company now has partnerships with the top three providers of cloud computing services, all of which are trying to improve their own AI products for customers. C3.ai sells AI products and services jointly with Amazon Web Services (AWS), Microsoft Azure, and Alphabet‘s Google Cloud.
But what do those giants want with such a small AI company? Back in 2020, a team of senior commercial software engineers ran a test to see how much C3.ai could improve application development time on AWS, and the results were remarkable.
By using C3.ai in conjunction with AWS, the application was completed 26 times faster and required 99% fewer lines of code. The project was done in 4.5 days compared to 118 days on AWS alone. The report also noted that a team of less experienced developers would likely complete an application 100 times faster with C3.ai, as they’d derive significantly more benefit.
That sounds a lot like what Ark Invest is talking about.
C3.ai is switching up its revenue model to prepare for future growth
The company has always sold its applications under a subscription-based revenue model. But it’s incredibly inefficient because it can take months to determine and then negotiate pricing, which is time the customer loses.
Now, C3.ai is moving toward a consumption-based model where clients simply pay for what they use with fixed (but scalable) unit pricing.
This transition will result in a slowdown in revenue in the short term because it’s going to take time for customers to scale up their usage. But from fiscal 2024 (beginning May 1, 2023), the company expects revenue growth to accelerate back above 30%.
Plus, the consumption model will allow C3.ai to onboard customers with far less friction, so watch out for a jump in the number of organizations signing up.
C3.ai has a substantial opportunity ahead
Management is betting the addressable market for enterprise AI will top $596 billion by 2025, but based on Ark Invest’s outlook for the AI industry as a whole, that might be far too conservative.
It appears investors are beginning to see the opportunity C3.ai offers because its shares have rallied a whopping 154% already in 2023. The broad hype around AI created by the conversational platform ChatGPT at the moment has certainly helped, as has the start of a recovery in the Nasdaq-100 tech stock index.
C3.ai is in good financial shape as it transitions its revenue model and rides the AI wave. It’s still investing heavily in customer acquisition to fuel growth, so it reported a net loss of $140 million in the first six months of fiscal 2023. But with $840 million in cash, equivalents, and short-term investments on its balance sheet, it has plenty of runway for the next couple of years.
Despite the stock’s massive run so far this year, it’s still down 82% from its all-time high. It’s not too late for investors to buy in, especially given the AI industry’s potential between now and 2030, according to Ark Invest.
Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Anthony Di Pizio has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Alphabet, Amazon.com, and Microsoft. The Motley Fool recommends C3.ai. The Motley Fool has a disclosure policy.